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FROB is not NAMA

The post’s title acts as a self-selection device, since if your interest is piqued by the mention of Spain’s Fondo de Reestructuración Ordenada Bancaria (FROB) or Ireland’s National Asset Management Agency (NAMA), you’re already in the world of Eurozone “bad banks” and perhaps willing to read on. The issue at hand is how the respective bad banks interact with the ECB.

The case of NAMA is easier: notwithstanding the political bamboozling that surrounded the creation and operation of NAMA, it has no direct interaction with the ECB. It takes bad loans off banks’ balance sheets at a steep but probably insufficient discount to face value. It gives the banks an Irish government-backed bond in return. The banks can take these bonds to the ECB for refinancing if they want. End of story.

Now to the FROB and its evolution into a bad bank. As a general rule, the ECB’s website occasional roundup of other decisions of the ECB is often just as interesting as its monetary policy decisions. From yesterday’s:

On 27 September 2012 the Governing Council took note of the annual review of the list of acceptable non-regulated markets for Eurosystem monetary policy operations and decided that: (i) Hi-MTF and the OTC market for Belgian Strips would be added to the list; and (ii) the MTS Deutschland market for Bubills, which closed in April 2012, would be removed from the list. In addition, the Governing Council approved the classification of the Fondo de Reestructuración Ordenada Bancaria (FROB) as an agency. The debt instruments issued by the FROB will thus fall under liquidity category II of eligible assets for Eurosystem credit operations.

With the necessary following of the trail of crumbs, it appears that FROB was previously liquidity category III, meaning it was treated as equivalent to corporate bonds and therefore subject to stringent haircuts when it came to being used as collateral at the ECB. Now without much fanfare, it’s classified as government agency debt: from the perspective of anyone thinking about holding FROB bonds, a big improvement.

A couple of implications flow from this. First, the understandable fussing about whether legacy bank recapitalizations in Ireland and Spain can be mutualized needs to pay attention to what is happening at the technical level as well as the political level. ECB refinancing is a mutualization mechanism, a fact not lost on its German critics. Spain is using this mechanism and presumably will do so a lot more with its more favourable collateral eligibility. Ireland is not using this channel, though of course its banks are refinancing lots of other stuff with the ECB. Second, the ECB says that FROB is a government agency. Some of the financial engineering proposals of recent months seemed design to create the impression that it wasn’t. Joined up government at the EU level is probably too much to hope for.

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6 thoughts on “FROB is not NAMA”

I think generally you are making a good point. But in fact in this case FROB isn’t the bad bank, it is in fact a funding agency used by the sovereign to inject liquidity into (read nationalise) banks. The new classification looks about right. The bad bank equivalent of NAMA is now being set up in Spain, and it will be called SAREB (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria).

Yes, I think that is part of it… FROB debt, which is government guaranteed, was still off balance sheet and not part of General Govt Debt — though most analysts know to include it, and it comes up as a gov’t entity on Bloomberg functions.
Now that the ESM is not going to take over “legacy assets” and mutualize debt used for bank rescues, Spain might as well consolidate this, although FROB still won’t show up as Central Govt debt strictly defined.Why bother pretending, especially as the higher funding cost due to credit risk as well as the repo margin is real.
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On the basis of the presentation made by FROB yesterday, it appears that SAREB will be structured like NAMA Investment Limited i.e. a SPV in which the sponsoring agency is a large minority shareholder but there is enough equity from the private sector to keep it off the public books. But SAREB will pay for the loans it buys with government guaranteed notes (slide 12), just like NAMA. However, once the banks transfer loans to SAREB at a massive discount, they will be undercapitalized and FROB will have to find the funds to recapitalize them. At that point, its agency classification may help.